FINRA FINRA-SERIES-6 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 221:

  Which of the following relationships regarding shares of common stock are necessarily true?

  I. shares outstanding > issued shares

  II. authorized shares ≥ issued shares

  III. issued shares = treasury shares

  IV.

  issued shares ≥ shares outstanding

  A. I and II only
  B. II and IV only
  C. I, II, and III only
  D. II, III, and IV only
  I. shares outstanding > issued shares II. authorized shares ≥ issued shares III. issued shares = treasury shares IV. issued shares ≥ shares outstanding
  B. II and IV only

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  Explanation/Reference:

  Only Selections II and IV are necessarily true. The number of authorized shares must always be greater than or equal to the number of shares that the firm offers to the public, which are the issued shares. The number of issued shares will be equal to the number of shares outstanding as long as the firm doesn't buy back any of its outstanding shares. Otherwise, the number of issued shares will exceed the number of shares outstanding since issued shares = shares outstanding + treasury shares. The issued shares would only be equal to the treasury shares if the firm repurchased all its shares outstanding.

• Question 222:

  The total of a mutual fund's front-end load, rear-end load, and 12b-1 fees may not exceed: A. 10.0% of the fund's offer price.

  B. 10.0% of the fund's net asset value.
  C. 8.5% of the fund's offer price.
  D. 8.5% of the average annual net assets of the fund.
  C. 8.5% of the fund's offer price.

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  Explanation/Reference:

  The total of a mutual fund's front-end load, rear-end load, and 12b-1 fees may not exceed 8.5% of the fund's offer price.

• Question 223:

  The profile of the Invesco Utilities Fund stipulates that 80% of its funds will normally be invested in stocks of firms in utilities-related industries. This suggests that the Invesco Utilities Fund is:

  A. a sector fund.
  B. a non-diversified investment company.
  C. an asset allocation fund.
  D. both A and B.
  A. a sector fund.

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  Explanation/Reference:

  Invesco Utilities Fund profile suggests that the fund is a sector fund, which is a specialized fund that invests mainly in stocks within a specific industry. This does not mean that it is non -diversified. As long as it is invested in a portfolio of securities with a value exceeding 75% of its assets such that no more than 5% is invested in any one firm and no more than 10% of any firm's voting stock is owned, it is considered to be a diversified management company.

• Question 224:

  Nat Informed places a market order to buy 200 shares of Abercrombie and Fitch (ANF) on Thursday, September 16th.

  When will Nat be required to pay for this Transaction?

  A. by the end of the trading on September 15th.
  B. on the next trading day, September 16th.
  C. on Tuesday, September 21st.
  D. on Friday, September 17th.
  C. on Tuesday, September 21st.

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  Explanation/Reference:

  If Nat places an order to purchase 200 shares of Abercrombie and Fitch on Thursday, September 16th, payment will be due on Tuesday, September 21st. The settlement date for stock transactions is T + 3, which means the third business day after the trade. Saturday is not a business day.

• Question 225:

  Dr. Floss has just earned his dental degree and wants to establish a private dental practice. He has had a bit of sticker shock at the price of all the equipment this will require him to purchase. Because he still has a large student loan to repay, he has been unable to borrow any money from his financial institution. To raise capital, he decides to sell fifty ownership interests of $1,000 each to interested investors and takes out a full page ad in a local newspaper to advertise this investment. In this scenario:

  A. Dr. Floss has not violated any laws since the notes have a face value of only $1,000 and he is selling them to a maximum of 50 different investors.
  B. Dr. Floss can be charged with criminal fraud under the provisions of the Securities Exchange Act of 1934.
  C. Dr. Floss has violated the provisions of the Securities Act of 1933 and may face civil penalties.
  D. Dr. Floss has not violated any laws since these ownership interests do not fall under the definition of a security.
  C. Dr. Floss has violated the provisions of the Securities Act of 1933 and may face civil penalties.

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  Explanation/Reference:

  If Dr. Floss offers fifty ownership interests of $1,000 each for sale to interested investors, he has violated the provisions of the Securities Act of 1933, which requires that new securities be registered unless they are exempt from registration, and may face civil penalties. There is no evidence that he has made any misrepresentations or otherwise attempted to defraud investors, so he is not subject to criminal fraud charges. The ownership interests do fall under the definition of a security.

• Question 226:

  Which of the following statements about 1035 exchanges are true?

  I. A 1035 exchange refers to the exchange of all of the shares owned in one mutual fund for shares of another mutual fund in the same family of funds.

  II. A 1035 exchange refers to the exchange of one variable annuity contract for another variable annuity contract without the need to pay tax on any of the income or capital appreciation associated with the original contract.

  III.

  A 1035 exchange refers to the exchange of a variable annuity contract for a whole life insurance policy offered by the same company with no tax consequences to the transaction.

  A. I only
  B. II only
  C. I and II only
  D. I, II, and III
  I. A 1035 exchange refers to the exchange of all of the shares owned in one mutual fund for shares of another mutual fund in the same family of funds. II. A 1035 exchange refers to the exchange of one variable annuity contract for another variable annuity contract without the need to pay tax on any of the income or capital appreciation associated with the original contract. III. A 1035 exchange refers to the exchange of a variable annuity contract for a whole life insurance policy offered by the same company with no tax consequences to the transaction.
  B. II only

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  Explanation/Reference:

  Only Selection II is true regarding 1035 exchanges. A 1035 exchange refers to the exchange of one variable annuity contract for another variable annuity contract without the need to pay tax on any of the income or capital appreciation associated with the original contract. This does not refer to the exchange of one mutual fund for another, which is a taxable event; nor does the 1035 exchange involve exchanging a variable annuity for a life insurance policy.

• Question 227:

  Which of the following statements regarding the tax treatment of variable annuity contracts is false?

  A. Earnings on the contributions to a variable annuity are not taxed during the accumulation phase.
  B. If an investor opts to make a random, partial, lump sum withdrawal, the entire amount of the withdrawal will be taxed as ordinary income to the investor.
  C. If an investor opts to receive regular payments of a specific amount -i.e., annuities-part of each payment will be considered repayment of principal and will not be subject to taxation.
  D. An investor who makes a withdrawal prior to having reached the age of 62 ½ will be subject to a 10% penalty on the withdrawal.
  D. An investor who makes a withdrawal prior to having reached the age of 62 ½ will be subject to a 10% penalty on the withdrawal.

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  Explanation/Reference:

  The false statement is that an investor who makes a withdrawal prior to having reached the age of 62 ½ will be subject to a 10% penalty. As long as the investor has reached the age of 59 ½, no penalty will be assessed.

• Question 228:

  Clem Shyster is a registered representative with a family of mutual funds. A married couple in their 50s sought his advice about how they should best invest an $80,000 profit that they had received when they sold a rental property they owned for a number of years. Their investment profile indicated to Clem that their main investment objective was capital appreciation and that they were willing to accept moderate levels of risk. Clem advised them to invest $10,000 in eight different growth funds, each of which had a 7% front-end load.

  Has Clem violated any securities laws with his recommendation?

  A. No. Growth funds invest in stocks that are selected to provide the capital appreciation that Clem's clients need, and an investment in eight such funds will provide them with maximum risk diversification.
  B. Yes. Although growth funds provide some amount of capital appreciation, Clem should have recommended that they spread their money among eight different aggressive growth funds instead, to achieve even greater capital appreciation.
  C. Yes. Clem should have advised them to invest in funds that had a deferred sales charge instead of a front-end load.
  D. Yes. There is a lot of overlap of the individual stocks in which growth funds invest, so recommending that they spread their funds among eight different growth funds has not provided them with significantly more diversification, and it has cost them more to do so, which will benefit Clem.
  D. Yes. There is a lot of overlap of the individual stocks in which growth funds invest, so recommending that they spread their funds among eight different growth funds has not provided them with significantly more diversification, and it has cost them more to do so, which will benefit Clem.

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  Explanation/Reference:

  Yes, Clem has violated securities laws with his recommendation that his clients spread their money among eight different load, growth funds because there is a lot of overlap in the individual stocks in which these funds invest, so this strategy has not provided them with significantly more diversification; it has just cost them more, which will benefit Clem since he gets to pocket part of that load fee himself. He has made an unsuitable recommendation and has not upheld NASD's rules involving fair dealing with customers.

• Question 229:

  Connie Serve placed an order to purchase five, $1,000 Treasury bonds in the secondary market on Tuesday, October 12th. Connie will be required to pay for this purchase on which day?

  A. Tuesday, October 12th.
  B. Wednesday, October 13th.
  C. Thursday, October 14th.
  D. Friday, October 15th.
  B. Wednesday, October 13th.

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  Explanation/Reference:

  Connie will be required to pay for this purchase on Wednesday, October 13th. The settlement date for Treasury securities and exchange-listed options is one business day after the trade date, or T + 1.

• Question 230:

  Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?

  A. a Treasury strip with 15 years to maturity
  B. a bond with a 10% coupon and 5 years to maturity
  C. a bond with a 5% coupon and 10 years to maturity
  D. a zero-coupon corporate bond with 12 years to maturity
  B. a bond with a 10% coupon and 5 years to maturity

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  Explanation/Reference:

  If Pete is expecting interest rates to increase, the bond with a 10% coupon and 5 years to maturity is the best investment. If interest rates increase, bond prices fall, so he will want to invest in the bond that will have the lowest percentage decrease in price. This will be the bond with the shortest duration, which is the bond described in Choice B. It has the highest coupon and the fewest years to maturity.